Saturday, 27 March 2010: 15:10
The relationship between savings, investment and growth has been vigorously debated in the theoretical and empirical literature following the pioneering work of Feldstein and Horioka (1980). This paper extends that debate by elaborating on the causal relationship between savings, investment and growth in EU Member States during the period 1980-2007 using the newly developed Autoregressive Distributed Lags (ARDL) bounds testing approach to cointegration and impulse response analysis of vector autoregressive models. The results of the causality test and impulse response analysis suggest that GDP growth has more important effect on investment; and investment has greater effect on saving than saving does. The main conclusion is that when designing economic policy it would be very important to focus on factors that stimulate investment and growth. Policies that focus on stimulating investment and economic growth through improvements in domestic saving conditions are unlikely to be very successful.